ACFCS Special Contributor Report: Crowdfunding-An unorthodox way of Money Laundering? Definitely…maybe…

The Skinny: 

  • In this special contributor report by Scotiabank AML analyst, Ahsan Habib, he expertly tackles the fincrime compliance tangles tied to crowdfunding. 
  • At issue is that funding platforms in the nascent but burgeoning sector, in some cases, can be abused by money launderers, fraudsters and even terror groups. 
  • Part and parcel of the challenge is that in many jurisdictions, the crowdfunding space, while acting in a similar way to banks or securities firms, is not subject to formal AML rules – leaving the duty to craft programs to counter criminals as optional.

By Ahsan Habib
Analyst AML, QA Scotiabank
February 27, 2020

With minor edits and content additions by ACFCS VP of Content, Brian Monroe. 

A sneak peek

Crowdfunding is used in support of a wide variety of activities, including disaster relief, citizen journalism, support of artists by fans, political campaigns, and increasingly for startup company funding.

It is a concept through which an issuer can use the Internet to raise money for a business purpose through small contributions from investors, donations to a particular creative project, like a video game, music album or money can be raised for certain causes, such as a charity, or to help victims from a disastrous event, think the wildfires in Australia. 

By taking in small donations from many parties, business owners can reach their target amount and begin developing their product.

Some of the biggest names in this nascent but burgeoning sector include Kickstarter, Indiegogo, Causes, Patreon, GoFundMe, and others.

They each have different focus areas. Kickstarter, for instance, is considered by many the best overall crowdfunding platform, focusing on “tech and creative entrepreneurs fund their projects before getting a loan or raising money for venture capital.”

Kickstarter alone has raised nearly $5 billion with more than 155,000 projects funded since its inception in 2009. More than 17 million people have backed a project, $4.8 billion has been pledged, and 178,032 projects have been successfully funded, according to the company’s website.

Potential funders can browse a bevy of verticals, from arts and film to publishing, video games to tabletop D&D-style adventures and more.

In most cases, these initiatives are legitimate and the crowd-sourced funds are used to benefit those who have encountered illness or a personal, familial or regional tragedy or those who are determined to finance their next big project – without going through credit checks, a rigorous bank loan process or begging at the feet of venture capitalists. 

However, in a growing number of cases, crowdfunding websites are being used for illicit purposes – including money laundering.

Breakout Box 1  Crowdfunding: Who are the main players, what do they do and what do they say about fincrime compliance?

First gaining mainstream fame in the early 2000s, crowdfunding in its simplest form is a way of soliciting financial contributions from people around the globe through an online platform. The most well-known sites today include Kickstarter, GoFundMe and IndieGoGo.

There are several types of crowdfunding, including these most common ones:

  • Rewards-based crowdfunding: Gathers collections to fund projects, business ventures or personal causes (e.g., raising money to fund production of an amateur singer’s album).
  • Debt-based – or person to person (P2P) – crowdfunding: Where people can apply to the platform for unsecured loans that they must then repay with interest.
  • Donation-based crowdfunding: Allows small organizations and even individuals to solicit donations for a variety of causes.

Suspicious activities can include:

  • Structured settlement: Deposits from crowdfunding sites being followed by structured cash withdrawals.
  • Funnel tunnel: Deposits received from multiple accounts and then payments immediately submitted to crowdfunding sites.
  • Personal attention: Personal accounts receiving deposits and checks from unidentified people and foreign businesses, with funds then being transferred to crowdfunding sites.

Equity Crowdfunding: A smart choice for Money Laundering

Instead of traditional investors, crowdfunding campaigns are funded by the general public. 

Equity crowdfunding platforms could be used to facilitate money laundering in at least two ways: The distributor of an illegal product – narcotics, unregistered firearms, etc. – could create a fake company and market that company’s securities on an equity crowdfunding platform.

Buyers could “legitimately” buy worthless shares via the platform, while also receiving the product on the side. Distributors would thus be able to receive funds electronically, rather than in cash, and could also aggregate multiple payments into one capital stream.

The online nature of the payments makes them easier to integrate into the financial system than proceeds from cash transactions.

In a second scenario: The distributor could create a fictional venture, and market its securities via a crowdfunding platform. Through an online alias, the same distributor could also invest illicitly received money into its own venture.

That would also be an easy way to move illegally gained money across borders.

This concern may be lessened, however, given that regulations currently limit crowdfunding activity to domestic companies alone. However, cross-border equity crowdfunding is already possible in Europe. 

Snapshot from the drama series ‘Breaking Bad’

An easy example of how crowdfunding and money laundering can converge was illustrated aptly on one of the most popular and universally feted television series of all time: “Breaking Bad.”

The critically lauded American basic cable television drama serious was about the story of Walter White – a mild-mannered high school chemistry teacher who turns to cooking crystal meth to pay for his terminal cancer treatment and provide for his family after he is gone.

At one point, Walt’s son, Walter “Flynn” White, Jr., sets up an online donation page to raise money for his dad’s cancer treatment.

In this particular story arc, they needed a middlemen/distributor and their only reliable middleman, corrupt lawyer Saul Goodman, used that donation site to funnel the meth money through its platform to give it the sheen of legitimacy.

They likely could have gotten away with it, too. But Walt’s biggest problem was not knowing when to stop. Overall, he made some $80 million from continuing to grow his drug business, but lost almost everything – his life, his family, and most of the money he made.

Breakout Box 2: AML and crowdfunding

One of the biggest issues around crowdfunding and financial crime is that in many countries, the sector is not subject to formal anti-money laundering (AML) rules, similar to banks, securities firms and other financial institutions.

The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) is cognizant of this gap. The bureau in April 2016 released a notice of proposed rulemaking that would have subjected certain crowdfunding portals to AML duties, but has yet to finalize the effort.

Kickstarter: “Helps tech and creative entrepreneurs fund their projects before getting a loan or raising money for venture capital.”

  • Any mention of AML: Not really on its main site. It’s main payment processor, Stripe, has a minor mention of AML and sanctions rules if you do some digging.

Indiegogo: Indiegogo’s crowdfunding campaigns are “where new and groundbreaking products take flight, sometimes long before they hit mainstream availability.”

  • Any mention of AML: Not really. But does state the company counters fraud through both “automated and manual reviews of campaigns and works closely with payment leaders to ensure your funds are processed securely and efficiently.”

GoFundMe: States it is the “#1 most trusted leader” in the crowdfunding space. “Free fundraising for the people and causes you care about.”

  • Any mention of AML: Not really. But states that its “Trust & Safety team works around the clock to ensure your safety and protect against fraud,” including tied to colluding with others to lie about a funding campaign to pocket the money, chargebacks after refunds or misusing funds.

When it is done under guise of Pyramid Schemes

Pyramid schemes could be considered the original crowdfunding, insomuch as those few at the top of the pyramid fund themselves from the large crowd at the bottom.

At some points, crowdfunding purports itself to be a unique peer-to-peer platform that allows “members” to donate directly to one another. 

Both pyramid schemes and Ponzi schemes involve unscrupulous investors taking advantage of unsuspecting individuals by promising them extraordinary returns in exchange for their money or convincing the donors about the supposed real impact of their donations to causes – and on that last point, a similar dynamic can be at play when it comes to crowdfunding.

Moreover, there is a very alarming and immediate reason why criminals could be trying to test the still-murky waters of crowdfunding platforms: In many jurisdictions, they do not cover obligated institutions for purposes of the AML/CFT Act.

That is, so long as they do not provide other additional services such as payment services or currency exchange services.

So, it’s currently a wide-open risk area where many banks and their financial crime compliance teams won’t know what types of people are funding these campaigns, or more importantly, for what purposes.

That puts more pressure on AML teams holding the accounts of crowdfunding platforms to not just inquire about basic customer due diligence, know-your-customer and risk ranking, but also to ask these clients what, if any, programs they have in place to identify or report on financial crime.

As a point of context, many financial sector areas that move funds domestically and internationally are not subject to AML rules, such as third-party payment processors.

But because some of these operations have been tied to high-profile fraud and money laundering cases, some banks have requested payment processors they are doing business with to voluntarily adopt full or partial AML programs.

At the same time, some payment processors themselves have chosen to adopt some AML defenses as a good faith effort to keep and strengthen their banking relationships.

Breakout Box 3: Crowdfunding a terror attack? Global watchdog states it could already be happening

When experts, talking heads and prognosticators debate the fincrime compliance vulnerabilities of the crowdfunding sector, they typically mention a penchant for fraud by unscrupulous charlatans and organized criminal groups attempting to cleanse ill-gotten gains.

But another equally dangerous threat is posed by terror groups, according to an October 2015 report by the Paris-based Financial Action Task Force (FATF) called, “Emerging Terrorist Financing Risks.”

The global arbiter of AML standards detailed a case study in this area, stating:  

  • The FIU of Canada has seen instances where individuals under investigation for terrorism-related offences, including attempts to leave the country for terrorist purposes, have used crowdfunding websites prior to leaving and/or attempting to leave Canada.
  • In one example, a reporting entity received information from law enforcement that an individual left Canada, which prompted an account review and a suspicious transaction report (STR) being sent to FIU Canada.
  • It contained details in regard to a crowdfunding website. Specifically, the reporting entity stated: This account was used for four transactions, totaling CAD 61.56, with a known crowdfunding website (web address provided).
  • This merchant is categorized by its merchant bank as “Professional Services.” The company’s website describes itself as an International Crowdfunding site, allowing people to easily set up a fundraising webpage and collect donations.
  • Most of the donation options are related to conflict relief in Country A, Country B and Country C.

What the backers say about crowdfunding

At least in the sense of many of the more well-known players in crowdfunding, they too have made a good faith effort at implementing some form of a formal AML program.

For example, many of the larger crowdfunding platforms have internal counter-crime systems that attempt to prevent suspect funds flowing through their platforms – chiefly done, however, from the vantage point of stopping fraud.

Even so, many believe it’s still possible you could setup a scam campaign, use a lot of stolen credit cards to fund the campaign and make it successful, and then let the crowdfunding platform transfer the money to you minus their fees.

Crowdfunding could be like an ATM for stolen credit cards. Advocates of crowdfunding say, this is not possible with any crowdfunding platform nowadays because they all ask for verification and identification details, in AML parlance, know-your-customer (KYC) details, that would limit such attempts.

But the fact remains there are very regulatory controls or exams done on the AML programs implemented by crowdfunding platforms – or if there are any AML programs at all.

Part and parcel of the problem is that the cumulative amount of funds involved in crowdfunding, while typically done by many individuals in small increments, is massive. For instance, 45 million Facebook users have reportedly raised more than $2 billion for various causes. If these funds go to the actual causes, that will deserve a big round of applause.

Common Red Flags

In Canada and across the globe, money-laundering watchdogs are studying the use of crowdfunding platforms by suspected terrorists.

Terrorism financing and high-risk traveler cases often entail relatively small amounts of money. Financial companies, money services businesses and casinos are legally required to submit reports to FINTRAC for cross-border, electronic transactions above $10,000.

  • However, suspicious activity related to money laundering through crowdfunding includes:
  • Deposits from crowdfunding sites being followed by speedy structured cash withdrawals.
  • Deposits received from multiple accounts and then payments immediately submitted to crowdfunding sites.
  • Personal accounts receiving deposits and checks from unidentified and unaffiliated individuals related to that account – such as those who are not relatives or tied to any known related businesses – and foreign businesses, particularly those in high-risk regions, with funds then being transferred to crowdfunding sites.

A boon or bane?

One common misconception is that crowdfunding is just useful for small businesses and startups. That sentiment in most cases is typically untrue.

While crowdfunding creates a funding opportunity that certain smaller businesses may not have received in the traditional way, it also is a great outlet for more established companies. The idea of “it’s not what you do, but why you do it,” should come first.

Many large companies can learn from the core principles underlying the concept of crowdfunding itself: flexibility and simplicity.

From the outset, banks looked at crowdfunding with a certain disdain. It’s possible for individuals to receive deposits from a crowdfunding site and to then structure withdrawals of cash from that account.

To be more specific, someone wanting to purchase illegal products or materials, such as narcotics, can pose as an investor and crowdfund a fake startup company – but one that is actually owned by the illicit drug distributor.

The buyer would, in turn, receive the narcotics and “equity” in the sham startup.

Over the past five years, cyber criminals have used crowdfunding websites to launder nearly $30 million. And the fact sheet does not look impressive. Money laundering tops the list of Suspicious Activity Reports (SARs) tied to crowdfunding websites.

Why it matters

As we mentioned before, what happens in the crowdfunding space matters – both to financial crime compliance professionals and law enforcement.

Why? Currently, there are more than 450 crowdfunding platforms in existence and a World Bank report states that revenue from this funding method could reach $96 billion by 2025.

It needs to be ensured, self-dealing and advancing the interests of its namesake rather than those of charity does not occur, as it happened like $100,000 cancer charity funds have been funneled into personal organization of Head of a big country.

And while donors to the Charity Foundation were told their money was going to help sick kids, more than $500,000 was re-donated to other charities, many of which were connected to that family members or interests.

Come on…let’s own some minimal ethics and morality which seem to be short-supplied these days. This is the first time in US history, a dark money group (who influenced US election) has been forced to disclose their donors in a certain time period.

In the coming years the challenge for policymakers will be to balance the competing interests of safety and simplicity, as they endeavor to maintain crowdfunding’s accessibility without leaving it overly susceptible to nefarious use.  

About the author

Ahsan Habib is currently working for Scotiabank, Canada in the bank’s AML Department. He is a seasoned banker from Bangladesh where he worked in correspondent banking and the foreign remittance department.

He is also vocal advocate against Human Trafficking on various platforms. Want to connect with Ahsan to share thought leadership on this and other fincrime compliance areas? Feel free to check him out on LinkedIn here.